How do you manage your budget?

[jack97]

Something to keep in mind, only if you can afford to take the risk. For example. by placing some funds in an ETF that track the SP500 such as 'SPY'or 'VOO' even over a short period of time (1 to 2 years) the return would be double digit, mine is ~ 12% in 9 months. This along with dividends at ~ 2%/year. One has some options with dividends such as reinvesting it back into the fund or using it to help pay bills. I look at the returns from the investment as another segment of "emergency funds", these returns can be sold (some call this "homemade dividends") and taxed as capital gain while the dividends are taxed as income. Keep in mind, some economist think we will have a recession around 2020, so the returns from the markets will not be great when this happens.

After 59.5 years, you can withdraw funds from the IRA or 401K without the penalty but taxed as income, this is another source of emergency funds. Also, there are other hardship scenarios where you can withdraw without the penalty.

 

[François Pugh]

My budget is simple. My paycheck goes into our joint account. Fixed costs (rent on apartment, mortgage, insurance) come out directly. Some expenses I pay by credit card (gas, internet, on-line purchases). I let my wife know how much the credit card bill is. She tells me if (and how much) I can take any money out to spend on food.

If you pay everything by credit card, they will keep track of it for you and send you a list of what you spent your money on. JUST REMEMBER TO PAY IT BY THE DUE DATE!

One way of cutting down on expenditures, is to ask your self if you really need this item before you buy it. It's surprising how little we really need.

 

[jack97]

If you pay everything by credit card, they will keep track of it for you and send you a list of what you spent your money on. JUST REMEMBER TO PAY IT BY THE DUE DATE!

Yes, never get over extended, esp the credit card. I always pay it off and will buy if I have cash in reserve. Given the career I have, my rule has been to keep over 2 years of liquid funds (split among bond funds, safe equities and a savings account) in case I'm out of a job.

 

[Monique]

What spreadsheet are you using? I need something simple as well.

Here's a sanitized version of it:

https://docs.google.com/spreadsheets/d/13iefaES3nAbZeVbHc9ELgaOPADJJodsOs4up9wnvEP8/edit?usp=sharing

Here's the explanation:

B5:B28 - this is where you put absolutely mandatory monthly expenses. I put anticipated recurring things, like car insurance, in there as well - split into monthly " virtual" payments.

B33:B67 - any recurring stuff that's not mandatory, like music subscriptions.

B71 is the calculated total of the above two categories.

G2 - this is the amount of spending you've allowed yourself for the month.

G3 - this is how much you carried over from the previous month. A positive number means you've been spending less than your budget; a negative number, not so much. This number is applied against this month's budget.

G4 - Same as B71 - the sum of mandatory expenses plus other periodic expenses

All of the above stays the same from month to month, perhaps with minor tweaks.

G6 on down is your day to day spending - anything you spend that's outside of those above recurring expenses. It changes from green to red when, oops, you've blown your budget. H6 on down is how much of your monthly budget remains.

Let me know if you have any questions ... I create a new tab for each month.

 

[Uncle-A]

Some years back a family member told me a few basics about money.
1. Buying a house should not be more than the total of three years salary.
2. Buying a car should not be more than one third of a years salary.
3. Total utilities for the year should be no more than half of your years salary.
4. Disposable money (recreation, eating out, cable TV, etc.) 10% of your years salary.

Now you do not buy a house or a car every year but the expenses of maintenance and insurance do take their toll on a budget.

 

[Monique]

Some years back a family member told me a few basics about money.
1. Buying a house should not be more than the total of three years salary.
2. Buying a car should not be more than one third of a years salary.
3. Total utilities for the year should be no more than half of your years salary.
4. Disposable money (recreation, eating out, cable TV, etc.) 10% of your years salary.

Now you do not buy a house or a car every year but the expenses of maintenance and insurance do take their toll on a budget.

Interesting. Did they talk about how they arrived at those numbers?

Utilities and rent on a ski condo are definitely not disposable .... right ....? Oops.

 

[Uncle-A]

Interesting. Did they talk about how they arrived at those numbers?

Utilities and rent on a ski condo are definitely not disposable .... right ....? Oops.

I think it was some basic rules of thumb for newly weds. 1970's style.

 

[Monique]

I think it was some basic rules of thumb for newly weds. 1970's style.

What's puzzling to me is that it lacks any commentary on retirement savings. I wonder if the 70s thing is relevant - weren't pensions much more common?

 

[noncrazycanuck]

always pay yourself first - that is the amount you put into your retirement plan.
the rest is what you live on.

credit cards are great for tracking expenses and often a nice tax free bonus at the end of year but ever miss paying in full before due date those bargains will be expensive.

never never (did I say never?) make a minimum payment on anything.

I find it easiest to pay card on the date the statement is issued - check purchases, track expenses and set up payment and your done for the month .

 

[Monique]

never never (did I say never?) make a minimum payment on anything.

Unless, of course, you're choosing between making the minimum payment, and not making a payment at all.

My primary credit card is at the same bank with my checking account, so I have an autopay set up for the minimum. That way, if something really goes haywire and I miss the full payment somehow - at least I don't get a penalty.

I find it easiest to pay card on the date the statement is issued - check purchases, track expenses and set up payment and your done for the month .

For whatever reason, I just have a recurring appointment in my google calendar - it sends me an email reminder that's automatically tagged with a bright pink "action required" label.

But I'm finding looking at my purchases every day, or every few days, very helpful. If I review a month at a time, I don't always remember what some of the smaller charges were. I also tend to gloss over the actual numbers. Forcing myself to enter them into that spreadsheet within a day or two really makes me internalize what I'm spending. Just looking at the statement doesn't do the same for me.

 

[Uncle-A]

What's puzzling to me is that it lacks any commentary on retirement savings. I wonder if the 70s thing is relevant - weren't pensions much more common?

I think you may have hit the nail on the head. Back in the 70's many people had pensions or they thought they could live on Social Security. Unlike today that most use 401K and/or IRA to plan for retirement. Just another thought may be that if it was for Newly Weds, planning for retirement would be a lower priority compared to buying a house and a car.

 

[Monique]

Just another thought may be that if it was for Newly Weds, planning for retirement would be a lower priority compared to buying a house and a car.

I am sure that's how people behave, but I'm also pretty sure they're usually "wrong." Yes, you need transportation (which in a lot of places, practically speaking, means having a car), and yes, you need a roof over your head. But it's recently been driven home to me, more than ever, how much early investing impacts retirement. For example - I have a good chunk of money from life insurance. It puts me in a position where I could buy a mountain condo without blowing my current day to day budget. But my advisor has finally pounded into my head that while the condo might appreciate (fully aside from HOA and/or maintenance costs), it is highly likely that over the next 20 years, investment would serve me a lot better. Like, "earlier retirement" numbers. Even if I reconfigured things at retirement to only have one residence, it still wouldn't make up for the loss of income. (That's where the "past performance doesn't guarantee future success" thing comes in - but the same is true for real estate.)

I had been thinking - "What's the difference? I'm paying rent anyway; might as well be slowly working up equity." But it's not that simple, especially if you decide to pay a big chunk up front to make the mortgage payment smaller.

Anyway, the same is true of skimping on retirement contributions to pay for a house - and when it comes to a car, even more so.

 

[fatbob]

Don't forget though that the ideal retirement strategy will only emerge in hindsight and you do have to live a worthwhile lifestyle until then. I wouldn't chuck everything into funding a second home but it's pretty clear that it's a major part of your lifestyle and if you have no mortgage to fund on your primary home it's at least a defensible indulgence. Plus I'd feel a bit daft renting for X years hoping that my fund kept pace with property inflation so I could eventually buy where I wanted.

Sometimes contentment and security isn't measured by numbers on a balance sheet alone.

 

[Monique]

Don't forget though that the ideal retirement strategy will only emerge in hindsight and you do have to live a worthwhile lifestyle until then. I wouldn't chuck everything into funding a second home but it's pretty clear that it's a major part of your lifestyle and if you have no mortgage to fund on your primary home it's at least a defensible indulgence. Plus I'd feel a bit daft renting for X years hoping that my fund kept pace with property inflation so I could eventually buy where I wanted.

Sometimes contentment and security isn't measured by numbers on a balance sheet alone.

Yes, absolutely. I only meant to explain how the financial impact of our choices is not always intuitive. I needed an advisor to explain to me why investing the lump sum now would result in a bigger return than buying a condo and then selling it at retirement. He wanted to make sure that I understood the tradeoff - I would retire later if I chose this path. Once explained, it's "obvious."

I doubt I'll give up my dream of owning a condo, because it's not all about the money. There are ancillary benefits, too - it's hard (verging on impossible) to find a rental that allows two large dogs. I wouldn't have uncertainty about rent increases or being booted. I could do pretty much anything to improve the interior - renting a tiny condo for seven years has given me a lot of insight into what I would change if it were mine.

As it turns out, my landlords have extended my lease for one more year, with only a nominal increase in rent. I'm paying well below market rate, and I believe they're doing me a favor (although there are likely other factors) by extending the lease - they've told me that they'll likely put it up for sale next summer. And that's another favor - knowing it's coming up. Another landlord would be charging me a lot more and might not give me a year's notice. My landlords have been fantastic (and we've been great tenants).

Similarly, owning even a primary home has downsides - the upside being that it's a forced vehicle for savings, when many people don't save at all, or not enough. And all that other stuff (pets, customization, fixed payment, not getting kicked out as long as you can afford it).

 

[Monique]

For that matter, paying off a house is likely not as financially beneficial as investing that money instead, at least with typical long term interest rates. And keeping the money in a savings account as you save up to pay the house off - further loss of income. But it definitely gave me peace of mind.

Of course, it's a straw man - would I *actually* have invested that money instead of saving it to pay off the house? Dunno. In the meantime, we raided the accumulating savings several times for large home projects/repairs - it was nice to have the liquidity to do that.

 

[nay]

Paying off your house can be thought of as “buying your equity”. Financially, this is a terrible idea.

Imagine if you went into your bank and wanted to open a savings account, and they said:

“Great. Here are the terms. You have to deposit part of your paycheck every month, you earn 0% interest, and you can only withdraw your money with a credit approved loan using your house as collateral.”

Would you sign up?

 

[Monique]

Paying off your house can be thought of as “buying your equity”. Financially, this is a terrible idea.

Imagine if you went into your bank and wanted to open a savings account, and they said:

“Great. Here are the terms. You have to deposit part of your paycheck every month, you earn 0% interest, and you can only withdraw your money with a credit approved loan using your house as collateral.”

Would you sign up?

Again, houses are forced savings vehicles. I might do that if I suspected I would otherwise fritter the money away on ale and whores (bikes and skis). And if, say, I had enough additional savings that it's virtually impossible I'd need to take out a HELOC.

You are completely right, and I didn't really understand the full implications of this choice. That's something I didn't start understanding until my FA described the implications of buying a condo (as I described above). Rationally, investing the money would have made more sense. But investments felt like a huge burden. It would be different today, having an actual FA keeping track of my money. (I know, I know, but believe me, there is such a thing as gross neglect, even when you're invested in ETFs or retirement based funds or whatever.) And on the other hand, my husband didn't want to have two mortgages going at the same time, and we were looking at condos, so there were external factors driving our choices. But it would be hard to overestimate my peace of mind knowing that the house is fully paid for. Irrational as it may be, when Eric died, it came up again and again on my list of things I didn't have to worry about.

Had a 1.5 hour talk with my FA last night, which was hugely helpful (I had a long list of questions). And he had some strategies I would not have thought to consider, or would fit into the category of "that's probably a good idea, but I'll procrastinate and/or forget to do it."

 

[Jenny]

Sometimes the comfort of having it paid off outweighs other considerations. We took out a 30 year fixed mortgage to buy ours, and paid extra every month with the intention of paying it off in 15 years. But we didn't want to be tied into the higher payment if something happened to our income. In the end, we added on, refinanced, and still ended up paying it off in 20 years. Our last payment was made the month before my income dropped by 30%, which was almost exactly the amount of the payments we'd been making. So there went the plan of putting that money into our investments. But we didn't have to figure out how to make the payments, either.

As for the budget, we do like a couple of others have mentioned. Main income covers all bills, HSA/401k/Roth contributions, secondary income goes into separate account for emergencies and planned big expenses (vehicle, insurance, roof, vacations etc.). We also keep that account at a base level that allows for unplanned big expenses.

Any money that’s still left in the checkbook is fair game.

 

[nay]

The problem with a 0% return is how destructive inflation is to value of the original investment over a long period of time. This is not something that should give anybody any comfort.

As an example, in 1970 my parents bought a house in suburban Washington DC (Fairfax County, VA) for $50,000. In 2003, they sold it for $505,000 in a peak inflated sellers market. This sounds excellent, but over 33 years only represents about 7% growth, about 2% of which was due to the major uptick in housing prices in the 2 years right before sale. But the value of that asset didn’t come from saving anything - 90% of it came from appreciation of the asset, which has nothing to do with buying the original equity.

In practical terms, the original “forced savings” of $50K in 1970 dollars had been devalued from a suburban family home to a reasonably nice car. This is the “money under the mattress” problem - cash loses value day by day as inflation raises prices.

Had they been able to pay interest only over that time and invested the difference at an 8% return, they would have had a second asset worth ~$770K - more than the house itself, because over time houses generally appreciate at the rate of inflation, except when there are financial sector driven housing bubbles.

I suspect all of us would be much more comfortable with the liquid asset of $770K over the $50K of 1970 equity still tied up in a house and unavailable to us except by taking out a loan against our own money.

Now having said this, I am carrying a 40 year fixed at 3%. As is said, “People don’t buy house price, they buy payments.” I can’t reasonably buy a lower payment than what I am paying, so it would be foolish to attempt to do so and pay interest only taking the risk of rate adjustments.

Anyway, people think of houses as assets, but assets pay you and that is the opposite of what a house does, at least to the extent you are living in it.

The asset for a house is the mortgage on the bank’s balance sheet. It’s a liability on our balance sheet that we can aspire to own outright, although I would keep a first position lien on a house of some moderate value as that is protective in the event you are ever sued against your personal assets since there is already a first position lien holder with collateral rights, and that lienholder has no rights against you so long as you make your payments.

I’m not saying there is all that much any of us can do about any of this - it’s investment and risk strategy that most people aren’t willing to manage against the emotions of “home”. Same reason many buy over leasing even though it may not make financial sense, especially with changes in the tax laws.

 

[Bad Bob]

How do I manage my budget?

Very poorly sometimes